Walker's World: Breaking the banks

WASHINGTON, Nov. 4 (UPI) -- As bankers and politicians argued again whether to split the Royal Bank of Scotland into a good and a bad bank, a key issue has made few headlines -- what governments have given banks with one hand they have taken away with the other.

RBC Chairman Philip Hampton noted that of the $60 billion the British government forked out to keep the bank afloat, more than half has gone into what he called "irrecoverable loss" in fines and settlements for the bank's past behavior in mis-selling insurance, interest rate swaps and the Libor scandal over conspiracy to manipulate interest rates.

Banks have become cash machines for governments and regulators. In 2012, fines for banks in the United States were $10.7 billion, of which UBS of Switzerland alone paid $1.2 billion for its role in the Libor scandal. That $10.7 billion was 7 percent of the banks' total profits of $167.7 billion.

Fines this year have hit $17 billion, with JPMorgan in the lead after its latest $5 billion hit. But this understates the real effects of the penalties the banks have paid.

With the full cost of its ill-fated mortgage venture with Countrywide still to be reckoned, Bank of America has forked out some $40 billion to pay for its various mortgage disputes. Last year, Wells Fargo, JPMorgan, Citi and BoA paid some $25 billion among them in penalties and borrower relief associated with the mortgage crisis.

Many commentators, including former regulators from the U.S. Securities and Exchange Commission, have pointed out the oddity of JPMorgan being hit with fines imposed on companies it bought because it was specifically asked to do so by U.S. government officials at the height of the crisis.

JPMorgan's woes aren't over. The SEC is investigating its hiring policies in China to see whether the bank breached the 1977 Foreign Corrupt Practices Act, which makes it a criminal offense to give "anything of value" to foreign officials to obtain "an improper advantage" by seeking to hire the children of China's elite.

There are claims the bank had a specific "sons and daughters program" to ensure it was well-connected.

There is another ongoing criminal investigation by the FBI and New York prosecutors seeking to learn whether the bank failed to sound alarms over Bernie Madoff's massive fraud.

Understandably, the banks have few defenders after the financial industry plunged the world into the crisis that began in 2007 with their mortgage policies, derivatives, structured investment vehicles and all the other excesses that have come to light.

And now the banks are being hit from every side at once. Not only are the regulators slamming on fines and leaving the banks open to costly civil lawsuits from disgruntled customers, they are also trying to ensure the banks are more stable in the future. That means upping the capital reserves the banks must hold, which will reduce the cash they have available for lending even as governments complain that small businesses find it tough to obtain credit.

Regulators around the world are tightening their rules, imposing new costs on the banks, but are doing so with only a limited eye on coordinating their work, which means banks face ever more different rules in different markets.

The Volcker rule in the United States and the Vickers plan in Britain seek to separate retail banking from investment banking, while the Liikanen plan for the eurozone doesn't and France has already decided to maintain the universal bank model.

At the same time banks face a serious threat as new competitors use technology to muscle their way into the banks' core competence of running the payments system. Telecom operators, who are building infrastructure on the assumption that half of all financial transactions will take place over the phone system by the end of this decade, are determined that they will grab a slice of the transaction fees this generated.

Facebook credits and Google wallet, eBay and Amazon -- and even iPad apps -- are nibbling away at the traditional banking monopoly over the shifting of money among accounts.

Then there is the shadow banking system of money market and hedge funds, credit and structured investment and other vehicles that often don't show up on bank balance sheets.

A Financial Stability Board report last year reckoned its overall operations totaled some $67 trillion, roughly the equivalent of the gross planetary product, or all the wealth created globally last year. The SBS is both competitor and component of the overall banking sector and it looks very much less regulated than the banks -- which could lead to problems in the future.

The bottom line is that seven years after the crisis began, with the main banks still too big to fail, the global economy still has no coherent assessment of what kinds of banks we want, how risky and how profitable we want them to be and what rules they should live by.

But they do make useful cash machines for governments and regulators, as well as for their customers.

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